– Japan’s economy risks taking another hit if US President Donald Trump slaps fresh tariffs on China, sparking a renewed US-China trade war, according to the government’s chief economist. 

“If a US-China trade war leads to higher tariffs, it’s likely to negatively affect Japan’s economy, based on past experience,” chief economist Tomoko Hayashi from the Cabinet Office said in an interview with Bloomberg. 

Still, Japanese companies may be a little better prepared to deal with the fallout from Mr Trump’s policies this time than they were during his first administration, given a widening of supply chains and more familiarity with the US President’s tactics, Ms Hayashi said.  

Ms Hayashi was one of the main government analysts assessing the economic impact of Mr Trump’s policies during his first term.

Her comments come as policymakers, investors and economists keep a close eye on Mr Trump’s trade policy amid fears that his threatened use of tariffs could batter global commerce and confidence in the growth outlook.

Mr Trump has announced plans to impose a 25 per cent tariff on goods from Mexico and Canada from Feb 1, along with a possible 10 per cent tariff on Chinese imports.

Further use of tariffs is expected as the President uses levies on trade as one of the key negotiating instruments for pursuing his America First agenda.

Ms Hayashi’s team points to a 7.1 per cent slide in Japan’s exports between the second quarter of 2018, just before Mr Trump’s first tariff salvo, and the first quarter of 2020 as evidence of the fallout from the US-China trade war at the time.

Most of the impact was indirect, affecting exported components from Japan used in products assembled in China and shipped to the US.

Annual figures show Japan’s exports to China fell 7.6 per cent in 2019 in the first full year of Mr Trump’s tariffs.

That was the worst drop since bilateral ties between the two Asian nations were strained in 2012 during a spat over islands in the East China Sea controlled by Tokyo but claimed by Beijing.

Ms Hayashi said Japan could face a similar fate from US tariffs on China, a second time around, though companies may be better prepared for disruption.

“Having learnt from past experience, some Japanese firms have already put countermeasures in place, such as adjusting supply chains and stockpiling inventory,” she said.

The economist suggested that China is also more prepared for Mr Trump now than it was in 2017, having diversified its export markets and established factories elsewhere in Asia to reduce its reliance on direct shipments to the US.

Ms Hayashi said she is also closely watching Mr Trump’s proposed tax cuts, immigration reforms and energy policies, factors that may impact the overall performance of the US economy. While some policies such as higher tariffs are likely to have a negative effect on Japan and the global economy, others might bring benefits, she said.

“Tax cuts and deregulation typically boost the US economy, which accounts for 26 per cent of global gross domestic product,” Ms Hayashi said.

“If US growth increases, Japan’s economy will naturally benefit.”

Touching on domestic monetary policy, Ms Hayashi expressed confidence in the Bank of Japan’s (BOJ) decision-making, following its third interest rate hike in less than a year. 

“I fully trust the BOJ, as its officials are carefully analysing the situation on a daily basis and making decisions to achieve its price stability goal,” she said.

Ms Hayashi sees steady progress towards ending deflation, a longstanding government objective.

In particular, she pointed to growing price expectations among businesses and households, after nearly three decades of stagnation.

The economist emphasised the need for further confirmation of trends in the economy before declaring a complete exit from the risk of deflation, citing the importance of sustaining a virtuous circle between prices, wages and consumption.

Ongoing wage negotiations will be crucial for determining whether momentum can be maintained, she added.

A government declaration on defeating deflation would likely fuel speculation of further rate hikes by the central bank. BLOOMBERG

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